UPDATE 4-Yum's China woes slam sales and profits

February 04, 2013|Reuters

* China restaurant sales down sharply

* Company warns of further sales declines

* Shares down 14 pct from all-time highs

By Lisa Baertlein

Feb 4 (Reuters) - KFC parent Yum Brands Inc onMonday warned that it expects 2013 earnings to shrink ratherthan grow, as it grapples with a food safety scare in Chinawhere it makes more than half of its overall revenue.

Yum shares fell 6 percent in after-hours trading, as thenews was even worse than expected by the analysts, who havelargely stuck by the company in recent months.

Yum, which gets more than half of its overall sales andoperating profit from China, reported a 6 percent drop infourth-quarter sales at established restaurants in China due to"adverse publicity" regarding its poultry supply.

Its business there continued to suffer in January, when China same-store sales dropped 37 percent, including a 41percent fall for KFC and a 15 percent decline for Pizza HutCasual Dining.

As a result, Yum forecast a "mid-single digit" percentagedecline in earnings per share for 2013. Yum previously forecast2013 earnings per share growth of at least 10 percent, and analysts polled by Thomson Reuters I/B/E/S on average hadexpected the same.

Yum has nearly 5,300 restaurants in China, mostly KFC. Itsstrong reputation for high food quality helped it grow brisklyin a country where there have been some serious food safetyscandals.

But the company was shaken by revelations that two of itspoultry suppliers purchased chicken from farmers who usedexcessive levels of antibiotics in their animals. While thecompany was not fined by food safety authorities, it hassuffered a huge backlash on social media in the country.

"I don't think anybody saw this coming," said Edward Jonesanalyst Jack Russo, who like many others expects the company toeventually bounce back. "Investors are definitely going to needsome patience."

The company said it expected a same-store sales decline of25 percent for January and February combined for its Chinabusiness. It also said KFC same-store sales in China should turnpositive by the fourth quarter.

Yum said it still planned to develop 700 new units in Chinathis year and that it would begin an aggressive marketingcampaign to restore KFC's brand image.

Yum's fourth-quarter net income fell to $337 million, or 72cents per share, from $356 million, or 75 cents per share, ayear earlier.

Excluding special items, Yum had a profit of 83 cents pershare. That topped analysts' average estimate by a penny,according to Thomson Reuters I/B/E/S.

Total revenue rose to $4.15 billion from $4.11 billion.

Through Monday's close, Yum shares were down 14 percent fromlate November, when they hit an all-time high, but then sank onthe initial China sales warning.